The Ineffective and Unfair Policies of the European Union

By Vicenç Navarro

May 14, 2010 ""Information Clearing House" ---  There are many ways of interpreting the causes of the vast financial and economic crisis we are suffering in the world and, in particular, the European Union and the southern shores of our continent. One, derived from liberal sensitivities, assumes that the blame lies with excessive outlays in public expenditure, which have suffocated economic growth. This interpretation leads to the conclusion that we need to diminish this expenditure in order to reduce the deficit and public debt. Today, this view is generalised throughout most of the financial, political and media forums in the European Union. As proof of their confidence in this diagnosis, they point out that the European Union countries that are in worse shape today are those in Southern Europe -Greece, Portugal and Spain-, and Ireland, who have the largest deficits, due to the supposed lack of discipline in getting their expenditure policies under control. The supposed exuberance of this expenditure (the possibility of retiring at 55 in Greece, is the case most often quoted) is the cause of these countries' headaches. Hence the pressure to significantly cut their “exaggerated” public expenditure, in order to initiate a recovery and save themselves from collapse (and also save the euro, which is experiencing difficulties brought on by these countries). With regards to the high levels of unemployment, this is mostly attributed to the supposed rigidities of the labour market, consequence of excessively powerful and influential unions that are hampering the economic recovery with their staunch defence of workers who hold permanent contracts (and excessively high wages), thereby creating high levels of unemployment.

This interpretation of the causes behind the crisis results in the public policies promoted by the European Union, which consist of cutting public expenditure and employment, weakening social and labour rights and deregulating labour markets. The development of such policies (reaching their apex in the case of Greece) is considered necessary to come out of the crisis. In reality, this is merely the development of liberal policies that the corporate financial world has craved for so long, and who now use this crisis to bring about. Their social and human costs will be immense, and their impact on the crisis will be greater, accentuating it.

What is striking is that this liberal dogma, repeated by the news and persuasion media, has very little empirical evidence behind it. It is easy to show that the root cause of the problems experienced by countries with major difficulties is not their excessive public expenditure. In fact, in all of them (Greece, Portugal, Spain and Ireland), public expenditure as a percentage of GDP is below the mean for the Europe of the Fifteen, the group of most developed EU countries to which they all belong. The same happens with public social expenditure as a percentage of GDP, also below the EU-15 mean. You have an identical situation with public sector employment. The percentage of the population working in the public sector in all these countries is below the mean for the UE-15 (see Navarro, V. (ed). La situación social en España, Vol III. Biblioteca Nueva).

And as for the supposedly exuberant salaries, the figures show that, taking the wages of workers in the manufacturing sector as a point of reference, all these countries have salary levels below the mean for the EU-15 (even lower, in fact, than would correspond to their level of wealth) (see V. Navarro, Marta Tur and Miquel Campa, La situación de la clase trabajadora en España, at www.navarro.org, Economía Política section). In contrast, business and banking profits are among the highest, as well as tax fraud. All this data shows that their problems are not due to “excessive” public expenditure or “exuberant” wages.

For which reason there is a much more credible explanation for the origins and causes of the financial and economic crises that is marginalised and ostracised in the news and persuasion media and forums in Spain and the EU. The current crises are the direct consequence of the liberal policies promoted by the European establishment that have provoked a vast polarization of income and the creation of major inequalities. The cited countries have the greatest inequalities in the EU, in a continent where inequalities have grown enormously. Income from work as a percentage of total income has fallen massively, and with it demand, one of the most important causes of the crisis. The other cause of the crisis is the lack of credit, also the result of income polarization with the exuberant rise in capital gains, which were predominantly invested in speculative activities (such as real estate and the development of high-risk instruments) that created bubbles, provoking the major problem of the lack of credit when they burst.

THE PROGRESSIVE ALTERNATIVE
The solutions are plain to see. We need to stimulate demand in these countries, as well as all the EU, on the basis of income redistribution by increasing the purchasing power of the popular classes, counteracting low wages (which are the cause of low productivity) and a vast expansion of public expenditure that aims to create jobs, precisely the opposite of the policies being brought into play by the EU. No one has ever come out of any depression or great recession in the 20th century (like the current one) without a massive expansion of public expenditure and the growth of debt. The Great Depression was resolved with the New Deal and the large increase in public expenditure during World War II. In Europe, the reconstruction of economies destroyed by the Second World War was based on massive public fiscal and social investment, facilitated by the Marshal Plan. To believe, today, that we can come out of this huge recession without a similar increase in public expenditure throughout the EU is to ignore the lessons of history. Cutting public expenditure is writing a suicide note. In fact, if it were not for its cuts in public expenditure, Spain would already be out of the recession.

As for the other major problem, the lack of credit, this needs to be resolved through public intervention, not to help the banks, as is happening now, but to guarantee access to credit. As was to be expected, the austerity measures demanded of the popular classes by the EU are accompanied by very generous measures for the banks, both Greek and German (among others), holders of Greek debt. As Joseph Stiglitz was good enough to point out, if all the bank “bailouts” had been invested in the creation of public credit banks, the lack of credit would already have been resolved. 700,000 million dollars has been spent, in the US alone, to save the banking sector, when with this money we could (and should) have set up a public banking system that could guarantee access to credit by business (especially small and mid-size) and the citizenry. Much the same thing has happened in the European Union (see V. Navarro, ¿Por qué no banca pública? www.vnavarro.org, Economía Política section).

What we are seeing today is the climax what used to be called “class warfare”, where the dominant classes led by financial capital are imposing their demands on the popular classes in order to recoup their yields. As Warren Buffet, one of the wealthiest people on the planet and connoisseur of the corporate financial world to which he belongs, has well said, “there are classes and class warfare, and my class is winning this struggle”. The famous saying of tightening your belts only applies to the dominated classes. The dominating classes do not even wear belts. The inexistent regulation of the banking sector, despite being the cause of the financial crisis, already two years back, shows to what extent politics is shaped by corporate financial interests, which are doing massive damage to the real economy. It is no surprise to find the so-called democracies facing serious problems of credibility that question their very legitimacy. The social unrest in Greece is the beginning of a process that will bring to life what till now only seemed passive, expressing itself through voter abstention. The transformation of this passive abstention into active agitation will, from now on, be a constant in the coming years. The danger is that this agitation may be capitalised by the right, as is presently occurring in the US. We will see what happens in the European Union.

Published in the digital magazine SISTEMA, 7 May 2010
Spanish original on the author's website http://www.vnavarro.org/?p=4242